In the belly of the Dragon

On my first visit to China over two decades ago, I was struck by the sprawling mega cities and the towering metallic skyscrapers, while being stung by the reach of the Chinese authorities when trying to access global news via the internet.  In China, they call it ‘responsive authoritarianism’, with the Communist Party gradually shifting from autocracy to democracy, adapting to the demands of a modern Chinese society.  The media has also had to evolve from a purely government funded ideological tool to self-financed business enterprises. As online media grew in China, the broader populace gained more of a voice and the usual methods of state control proved increasingly difficult- if not- impossible.

In 2017 in Davos, in the face of Donald Trump’s “America First” stance, Chinese President Xi Jinping condemned protectionism as “locking oneself in a dark room”. Xi outlined a bold vision to become the global innovation leader by 2035. But China’s growing economic power has papered over many cracks. While mass industrialisation has been the most successful poverty alleviation programme in human history, inequality, corruption and environmental decay have plagued the country’s growth miracle.  China is also trying to escape the middle-income trap – which tends to impact countries which have grown on the back of low wages. With the rapid growth in labour costs and an ageing population, it has become increasingly difficult for China to remain the lowest cost producer of manufactured goods globally. In a bid to improve productivity and foster innovation, China embraced the development of digital platforms. Tencent, the Naspers associate, was instrumental in turning its mobile messaging app WeChat into a dominant lifestyle platform which includes mobile payments, gaming, and video sharing.

However, something changed radically in 2018. The Constitution was amended to abolish the two-term limit on the presidency and there was a crackdown on online media. Within the Cyberspace Administration of China, CAC (sic), the Chinese internet regulator, Zhuang Rongwen – who had worked for Xi as an economic planner in Fujian province – ascended to the top job in the same year. The agency started to aggressively clean up online political and religious content, removing apps and recently launched a hotline to report online comments against the party. This agency was also instrumental in censoring media outlets who tried to warn of the Coronavirus (COVID-19) outbreak in Wuhan. Long term investors in Naspers will also recall that in 2018, the Naspers share price declined by over 20% as the regulator started to scrutinise some of the practices of Tencent more closely.

The Chinese internet regulator has also been focusing on Chinese companies with foreign listing ambitions. Perhaps spooked by Edward Snowden’s leaked report that the United States (US) was monitoring Chinese companies, Beijing has become more circumspect of companies moving outside of their direct jurisdiction. Last year, the regulator stopped the planned Hong Kong listing of the financial services arm of Ali Baba, Ant group under the guise of stopping anti-monopolistic behaviour. More recently, the fintech giant, which has over a billion customers, is reported to have agreed to share that data with state owned companies, which will provide regulators prime access to customer information. In another move that shocked capital markets, the Chinese regulator took aim at Didi, the world largest ride-hailing app, which was founded a decade ago by a former Alibaba executive, and which listed on the New York stock exchange only last month.  In what seemed as retribution for not following instruction and choosing to list in the US instead of Hong Kong, the regulator restricted Didi from accepting new users and Chinese app stores were banned from offering the Didi App. The Didi share price which rose by some 15% on listing, valuing the company at $80 billion, is now trading below its listing price.

For local Naspers and Prosus shareholders, whose most valuable investment is in Tencent via a variable interest structure (where the shareholders don’t directly own the Chinese company), the large and growing discount between the share price and the underlying investments of the company can be traced back to the regulatory noise coming out of Beijing. While it is true that President Joe Biden also issued an order to curtail the monopolistic positions of US big tech, one must hope that Beijing ulterior motives are not more sinister for those living in the belly of the Chinese dragon.